Market Recap: Tuesday, August 3

Stocks rose on Tuesday, with investors' growth concerns and worries over the Delta variant's spread at least temporarily outweighed by optimism over a batch of better-than-expected quarterly earnings results. Stephanie Roth, JPM Private Bank senior markets economist, and Chris Payne, Payne Capital Management Financial Advisor joined Yahoo Finance Live to discuss.

Video transcript

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ADAM SHAPIRO: We've got two minutes to the closing bell. Taking us there are Stephanie Roth, JP Morgan Private Bank Senior Markets Economist. Also, Chris Payne, Payne Capital Management Financial Advisor. Stephanie, let me start with you real quick, because the financials seem to be taking it a little difficult. With the yield on the 10-year, when we look at interest rates being so flat, and we had a lot of analysts saying we'd be close to 2% by now. What happened?

STEPHANIE ROTH: Yeah, absolutely. And we continue to think that rates should rise from here. We're expecting rates to hit 2.1% over the next 12 months. We've done a lot of work digging into the drivers of the rates and there are a lot of speculations out there, anywhere from technicals to the Fed to COVID in China. We think the latter two are the more recent drivers of rate. So certainly when it comes to the Delta variant, that has been a driver of rates moving lower. And certainly concerns around China has also been a headwind. We do think those are largely driven outside of the US.

So when it comes to domestic factors, domestic growth actually looks fairly solid. We got GDP last week, consumption was nearly 12%. So we expect over the long run, domestic factors should win out and rates should move higher. So on the back of that, we do think that tactically, cyclicals should do fairly well. So we're barbelling cyclicals and tech here, and we think that rates should certainly continue to trend higher over the next 12 months.

ADAM SHAPIRO: We're going to talk about that, as well as perhaps opportunities in places like emerging markets with Chris. But real quick, let's take a look at what's happening in the markets as we get ready for the closing bell. Want to let you know on the Dow, some of the laggards today. You got Walt Disney is down about 1 and 1/2%. McDonald's is off 1 and 1/2%. Then there's Visa. Yesterday we were making a big deal about the after pay deal, By Now Pay Later, and that was taking a hit on Visa. But here is the closing bell.

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SEANA SMITH: And that does it for the trading day today. Again, we're seeing this move to the upside across the board. The Dow closing up 279 points, right around the highs of the day. The S&P up about 8/10 of a percent. The NASDAQ also posting gains, up 80 points. 10 of the 11 sectors moving to the upside. We're seeing leadership from energy, industrials and health care. In terms of what's not working today, communications services, it's the only laggard just in terms of sectors. Top performers in the Dow right now, IBM, Amgen and 3M.

Let's bring back Stephanie Roth and Chris Payne. Help us make sense of the recent action that we've seen. And Chris, I guess your assessment of today's trading, certainly there is some worry out there in terms of COVID and what the Delta variant means for the reopening and the economic recovery, yet we're seeing this move to the upside today. What's your big takeaway?

CHRIS PAYNE: Well, you know, this is something I talk a lot about on my podcast. I talk a lot about my clients, is that you always got to remember, the markets are always forward looking. It's never the news today that's what's affecting the markets, because remember, if it's in the price, if it's in the press, it's in the price. And if you think about it, they're talking about requiring vaccines, they're talking about bringing the mask mandates back.

The market doesn't care about that. The market just looks forward, looks what's in for the future. And there's a lot of good things happening right now, like the infrastructure bill is looking very positive. People are getting out there traveling. Marriott just came out with its earnings. They beat there earnings at $0.79 earnings per share versus $0.57 a share a year ago. So even though things do look bleak, things are continuing to get better. And not to mention, don't underestimate Americans ability to spend. There's about $4.5 trillion sitting in cash on the sidelines, and that money's got to find its way into the market.

ADAM SHAPIRO: Chris, I want to ask you, I get it, the US market, never run from the US market, but get better yield, perhaps even better growth if you're looking at emerging markets. You made that point, that are only trading maybe at 16 times forward earnings. So would you send your clients, the people who listen to your podcast, look at China, even despite the crackdown we've heard about today with Tencent?

CHRIS PAYNE: Well, the problem with bull markets is they never let you in. But the question I always ask my clients is, which market are you talking about? If you're talking about the S&P, absolutely. It's very expensive right now. Trading at 22 times earnings, not paying great dividends. But on the other hand, to your point, if you look at the emerging markets right now, trading closer to 16 times earnings, but also paying a much better dividend at close to 2%, it gives you an opportunity to get in.

And then with all this news that's coming out of China with the government cracking down on the likes of Tencent Holdings and these educational, online educational programs, it's really depressed the price of emerging markets. So the way I look at it, the old adage is, buy low, sell high. Emerging markets are a great buy right now.

SEANA SMITH: Stephanie, we just heard Chris mention the infrastructure bill, how that's a positive for the markets. I'm curious to get your take about what this means for the US economy. I guess, how big of a boost do you see this potentially being?

STEPHANIE ROTH: Yeah, the infrastructure bill so far, based on the bipartisan package, isn't that meaningful for the US economy. It's about 0.2% per year. Certainly good and much needed for the economy. So that's a positive, but it's not a needle mover when it comes to GDP. We're now watching what might happen on the bipartisan infrastructure plan. Certainly, that could be a larger ticket when it comes to dollars spent, but we're also watching what might happen in terms of taxes. That could be net a positive for GDP, but a concern for the markets, and that's something we're watching really closely.

ADAM SHAPIRO: What do you think is the biggest issue to watch closely? Would it be, we're going to get the infrastructure bill. Reconciliation, that's another issue. That's $3.5 trillion, we'll deal with that after the recess. But the tax potential, I mean, the potential to raise taxes. When you're looking at the future, do you really think that this Congress, that this administration may actually succeed in doing that? Because even there are Democrats who are worried about doing that. Capital gains, for instance. They are not all signed into doing it.

STEPHANIE ROTH: Yeah, I mean, it's certainly a risk, and the market isn't focused on that. So to the extent that that plays out, the odds on that are certainly very difficult to pinpoint. But should that play out, that's a net headwind for the S&P. We're expecting net $5 roughly hit to earnings for next year as a result of that. If that doesn't pan out, then earnings next year should be even better than we're anticipating.

SEANA SMITH: Chris, what do you view as the biggest headwind to the market right now? Because I think after what was a drop last week, I think investors were a little bit rattled just in terms of what this could potentially mean. We certainly have seen a recovery. We're looking at another day of gains today. But just in terms of what should be on investors' radar, what do you have?

CHRIS PAYNE: I really think it's going to be inflation. The Fed's saying that inflation is transitory, but everywhere I look, my own clients who are business owners, they're paying more in wages, wages are going up. And typically what happens is, wages don't go down over time. So they don't typically go up and then go back down, they stay where they are and they continue to go up.

And even if you're just going out to the grocery store, things have just become more expensive. So not only do I think inflation is not transitory, I think it's here to stay. And I really think it's going to have, and impact different markets versus say like for example, like growth has been the big winner over the last 10 years. Big tech, I think big tech is going to face the biggest headwind when it comes to inflation, or like what we call long duration assets, whereas things like pipelines, commodities, things that are more value-based, I think those things are going to be more benefit from inflation.

ADAM SHAPIRO: Chris, the wages may not come down, but markets tend to adjust. And for instance, lumber. Lumber was 1,500. I forget how they actually measure it; came down to 1,000. So why wouldn't inflation settle? Why would the Fed get this wrong?

CHRIS PAYNE: Well, lumber, lumber did come back down in price. It's still a lot higher than it was a year ago. And you've got to think, they put so much stimulus in the economy, they practically fired a bazooka at it. And that's very inflationary. Again, the fact that they're paying employers more money, that's very inflationary. So I just think at this point based on those factors, it's here to stay.

SEANA SMITH: We want to get to some breaking news. We have of earnings out from Activision Blizzard. Dan Howley has that for us. Dan.

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DAN HOWLEY: We have a beat [AUDIO OUT] Blizzard on both the top and bottom line. They came out with [AUDIO OUT] the inclusion of some deferred revenue that they saw from digital subscriptions, as well as gain sales. Earnings per share was $0.91. That's versus $0.75. They also have beat on the projected for Q3 forecast. They're calling for $101.85 billion in revenue versus $1.79 billion for the coming quarter. They're however, going to see less in terms of earnings per share at $0.65 compared to what Wall Street was expecting at $0.75.

And this all, of course, comes against the backdrop of the recent sexual harassment scandal that's been going on at the company, the president of Blizzard stepped down, J. Allen Brack this morning. Is being replaced by two co-leaders. And so there's also a new lawsuit on top of the current sexual harassment lawsuit accusing the company of misleading investors, not telling them about the sexual harassment lawsuit beforehand.

ADAM SHAPIRO: All right, Stephanie, want to get back to this discussion about inflation, because what do you, I saw you wanted to get in on this. And it looks as if though the Fed may be getting it right that inflation is transitory. You're the economist, correct me if I'm wrong.

STEPHANIE ROTH: Completely agree with you on that. Inflation just screams transitory to us when we look at the data. A lot of it's been driven by used cars. When you take that out of the data, inflation isn't really scary. When you look at core PCE ex autos, it's actually just 1.8% over the past two year period. So from our perspective, you're starting to see signs that inflation is cooling. The data aren't really particularly scary to us. We continue to think that prices should continue to slow over the next year.

When it comes to wages, certainly wage pressures have been high recently, but we think that's driven by a couple of factors. Unemployment benefits, which are quite generous, and they're starting to roll off. We should just continue to see that heading into September. Concerns around COVID, that's certainly a transitory factor. And the child care issue is also, as schools start to reopen, we should see the wage pressures start to subside. So when we look at the data, it's not scary to us, and we certainly would agree with the Fed that inflation should be transitory here.

SEANA SMITH: Stephanie, lots of focus is going to be on the Fed's meeting out in, or when we hear from Jackson Hole at the end of this month. I guess, what do you think the Fed's meet, or what do you think the Fed's message, excuse me, should be? Or what do you think Powell needs to clearly, if I can speak, Powell needs to clearly articulate and communicate to the markets?

STEPHANIE ROTH: Yeah, I think Friday's payroll report's going to be important for that, because that's the last period before we head into the Jackson Hole. So on balance, the expectation should be that data continue to look solid. They're ready to remove, they're getting ready to remove accommodation. Our expectation is that in November they should announce taper, and in December they should do the taper. So we would expect it to be just in line with that. And continue to reiterate the message that the economy looks healthy and they're ready to remove accommodation.

ADAM SHAPIRO: Stephanie, Chris, hold one second, we got Lyft earnings. Jared Blikre, I'm going to steal the headline. Quote, "We had a great quarter," said Logan Green, Co-founder and Chief Executive Officer. Break it down for us.

JARED BLIKRE: Yeah, well, I'll tell you what. He also said, "We achieved adjusted EBITDA profitability." Keyword there, adjusted, but you get profitable in there, stock is jumping about 4%. So let me hit the numbers here. The exact figure for adjusted EBITDA profit was $23.8 million. There was an estimated loss of $40.2 million for the street, so big beat there. Revenue nicely topping estimates of $700.7 million, coming at $765 million. Adjusted net loss $18 million. We do see a loss there. Estimated loss was a little bit more than that, $72.5 million.

Active riders, this is a pretty impressive statistic here. 17.1 million. The estimate was for about two million lower, 15.4 million, so a big beat there. However, revenue per active rider did not meet the target, $44.63 versus estimates of a little bit higher, $45.37. That's really the only negative, slightly negative statistic I'm seeing here. And then I will give you the full quote, Adam, from Lyft CFO Brian Roberts here. "Q2 was truly exceptional. We grew active riders by more than 3.6 million from the prior quarter, generated 125% year over year revenue growth, and achieved adjusted EBITDA profitability." So last time I looked, the stock was up about 4% in after hours trading.

ADAM SHAPIRO: All right, Jared. $765 million. I think the expression is, I'm not mad at that.